Trading XIV & VXX Based on Data & Probabilities

You can't win in trading if your decisions are based on emotions, instincts, or hunches. Consistently successful trading requires objective and data-driven signals to identify trades with the highest probability of success. 

Fortunately, the market is always providing data-based clues on its trend as well as market sentiment. At Trading Volatility, our favorite indicators for trading both XIV/VXX and the broader market are the Bias and Spike Risk indicators. By taking a look the six month chart of these indicators (always posted on our Daily Forecast page) we can clearly see how sentiment has shifted over this time and the probabilities of a falling XIV/rising VXX have materially increased.

Our VXX Spike Risk forecasts the probability of a rise of 7% or more in VXX over the next two days. In the graph below you can see each day's forecasted Spike Risk (available at 4:30pm ET on the previous day) aligned with the percentage gain/loss of VXX.  There are three primary periods over the past six months:

1) Low risk (Apr 23 - June 10) - Spike Risk forecasts range between 15% and 35% while percent daily changes in VXX are mostly negative.

2) Mixed Risk (June 12 - Aug 19) - Spike Risk forecasts range between 16% and 58% in a choppy and indecisive market. Daily percent changes in VXX are mixed with big moves in both directions and a cluster of VXX gains in late July/early August while Spike Risk was elevated between 40% and 57%.

3) Moderate Risk (Sept 9 - today) - Spike Risk forecasts range mostly between 35% to 56%. VXX is seeing more up days than down days in its current trend, culminating with the most recent data point of a 56% Spike Risk with VXX +9% today. 

The readings from the Spike Risk forecast are reflected in our primary indicator for tracking trends in VXX and XIV, the VXX Bias. This is the key signal for us to trade with the trend and remain objective. Ultimately, the VXX Bias (left axis below) provides an indication of the directional pull of VXX. There are 3 distinct sections we can see in this chart as well. 

1) A negative VXX Bias during the low risk period (Apr 28 - June 16).

2) A mixed bias during out mixed risk period (June 17 - July 23).

3) A positive VXX Bias during the moderate risk period (Sept 19 - present)

You'll probably note some shorter periods of VXX Bias as well. Here we can highlight the fact that a positive or negative Bias forecast does not guarantee that VXX price will follow, however it certainly puts the odds in our favor. The signals keep us objective and help remove emotion from trading in a difficult market to set us up for long-term success. 

For full performance details of our Bias indicators visit this post. To go more in-depth on VIX, VIX futures, and our Bias indicators, check out our new e-book, available for free on Scribd.

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Link to Recording of Webinar with Bob Lang and Jay Wolberg

I was invited to join Bob Lang (options trading mentor at, contributor to, and one of Jim Cramer's go-to technical experts on Mad Money) in a webinar yesterday. The recorded video has been posted online for anyone interested.

We had a great conversation, covering a wide variety of topics in 80 minutes. To help you find topics of interest, I've outlined our discussion along with approximate minute marks.

- Show intro (0:00)

- Bob's current market analysis (1:50)

- Into of Jay (10:15)

- Overview of Volatility (13:25)

- Role of actual market volatility in pricing of forward looking volatility (VIX) (17:18)

- What happens during  recent, brief VIX spikes which quickly revert; impact of QE (24:00)

- Common misconceptions of VXX (30:28)

- Reasons for large blocks of VIX calls (36:15)

- Reason why actual volatility may be higher than implied volatility (39:40)

- Reasons for a rising VIX while the market is rising (41.45)

- Likelihood of seeing a VIX in the 90s again (45:00)

- Reasons for current low VIX regime (47:50)

- Recent pattern of buying XIV on dips and likelihood of continuation of this pattern (51:05)

- Letting data guide trading decisions (53:25)

- XIV technical analysis -- importance of 200-day moving average (54:40)

- XIV indicators (57:30)

- Possibility of rally in XIV in today's market & levels to watch for Friday (1:00:10)

- Do VIX levels have influence on whether equities go up or down (1:02:00)

- Preparing for Black Swan events (1:03:45)

- Current decision making for trading XIV in market Friday (1:08:00)

- Signals for start of new rally in XIV (1:10:30)

- Why Thursday's move in XIV was an indicator that VIX was overbid (1:11:45)

- Tour of free resources at (1:14:00)

If you are interested in learning more about trading options from a technical expert, check out Bob's website at and follow him on Twitter at @aztecs99.

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